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PI

PetIQ, Inc. (PETQ)·Q3 2023 Earnings Summary

Executive Summary

  • Record net sales of $277.0M (+32.1% YoY) and record adjusted EBITDA of $29.3M; both exceeded company Q3 guidance ($220–$240M net sales; $18–$20M adj. EBITDA). Gross margin expanded 200bps to 26.2% on operating leverage and manufacturing efficiencies .
  • Announced Services segment optimization: closing 149 underperforming wellness centers (45 closed in Q3; remaining 104 in Q4), targeting ~$6.0M net cost savings over 12 months to reinvest in mobile clinics and brand marketing .
  • Raised FY2023 outlook to net sales $1,060–$1,080M (+~16% YoY at midpoint) and adjusted EBITDA $99–$103M (+~30% YoY at midpoint). Year-to-date operating cash flow reached a company record $64.7M; Q3 CFO was $50.3M and net leverage improved to 2.8x .
  • Near-term stock reaction catalysts: visible operational discipline (services optimization), confirmed category share gains (OTC Flea & Tick, supplements), and a second FY guidance raise; management flagged Q4 seasonal trough, order pull-forward (~$15M sales, ~$3M EBITDA into Q3), and incremental A&P spend ($3M in Q4) .

What Went Well and What Went Wrong

What Went Well

  • Broad-based growth and share gains: OTC Flea & Tick category +7.1% in Q3, while PetIQ brands +15.2%; supplements grew 22.1% and dental/treats outperformed (Minties +36%, Pur Luv +136%). “We are pleased to report the highest third quarter financial results in the history of the Company” — Cord Christensen .
  • Margin and cash execution: Gross margin +200bps to 26.2% on scale and manufacturing efficiencies; adjusted EBITDA margin +280bps to 10.6%. Q3 CFO $50.3M; liquidity $249.6M; net leverage down to 2.8x .
  • Strategic brand investments: Management “leaned in” to A&P with proven ROI, positioning for 2024 conversion; Rocco & Roxie grew 10.1% ahead of plan with expansion into premium categories .

What Went Wrong

  • GAAP EPS depressed by restructuring: Q3 GAAP EPS $0.02 vs adjusted EPS $0.42, reflecting $8.5M restructuring charges tied to services optimization, including $7.3M accelerated depreciation .
  • Services footprint rationalization: Closure of 149 wellness centers underscores underperformance and conversion constraints (square footage, vet labor market), limiting ability to pivot locations to hygiene model .
  • Sequential revenue decline: Net sales fell from $314.5M in Q2 to $277.0M in Q3 due to seasonal mix and order timing; management expects Q4 to be the lowest contribution quarter, with ~$15M sales/$3M EBITDA shifted into Q3 and $3M incremental A&P in Q4 .

Financial Results

Quarterly Performance (oldest → newest)

MetricQ1 2023Q2 2023Q3 2023
Revenue ($USD Millions)$290.5 $314.5 $277.0
Diluted EPS (GAAP, $USD)$0.32 $0.32 $0.02
Adjusted EPS ($USD)$0.45 $0.46 $0.42
Gross Margin (%)21.4% 23.5% 26.2%
Adjusted EBITDA ($USD Millions)$30.7 $32.9 $29.3
Adjusted EBITDA Margin (%)10.6% 10.4% 10.6%

Year-over-Year Comparison (Q3)

MetricQ3 2022Q3 2023
Revenue ($USD Millions)$209.7 $277.0
Diluted EPS (GAAP, $USD)-$1.68 $0.02
Adjusted EPS ($USD)$0.03 $0.42
Gross Margin (%)24.2% 26.2%
Adjusted EBITDA ($USD Millions)$16.3 $29.3
Adjusted EBITDA Margin (%)7.8% 10.6%

Segment Breakdown (Q3)

SegmentQ3 2022 ($USD Millions)Q3 2023 ($USD Millions)
Products$176.2 $239.7
Services$33.5 $37.4
Total Net Sales$209.7 $277.0

KPIs and Balance Sheet (quarterly, oldest → newest)

MetricQ1 2023Q2 2023Q3 2023
Cash from Operations ($USD Millions)-$43.3 $57.7 $50.3
Cash & Equivalents ($USD Millions)$25.4 $78.4 $124.6
Total Debt ($USD Millions)$452.0 $449.6 $447.9
Liquidity ($USD Millions)$150.4 $203.4 $249.6
Net Leverage (x)4.5x 3.6x 2.8x

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net SalesFY 2023$1,010–$1,050M $1,060–$1,080M Raised
Adjusted EBITDAFY 2023$93–$97M $99–$103M Raised
Net SalesQ3 2023$220–$240M Actual $277.0M Beat vs guidance
Adjusted EBITDAQ3 2023$18–$20M Actual $29.3M Beat vs guidance
Incremental A&P SpendH2 2023~$2M (as of Q2 commentary) ~$4M total; $1M in Q3, $3M in Q4 Raised

Earnings Call Themes & Trends

TopicQ1 2023 (Prior Mentions)Q2 2023 (Prior Mentions)Q3 2023 (Current)Trend
OTC Flea & Tick category and shareStrongest OTC F&T YOY consumption in 18–24 months; e-commerce >50% of category; PetIQ outperformed Category favorable weather; PetIQ outperformed by 300–400bps; retailers emphasizing animal health Category +7.1%; PetIQ +15.2%; gains across 7/8 top resellers Improving
Supplements growthHealthy consumption; temporary SKU transition impact; would be >12% with transition +19.5% consumption; category +16.1% +22.1% growth; category doubled over 4 years Improving
Manufacturing efficiencies/marginsGross margin +50bps; services profitability improved Gross margin -110bps on mix; expected FY up 75–100bps Gross margin +200bps; mix and efficiencies cited Improving
Services strategy (hygiene, clinics)Early hygiene tests; frequency/value-add; cancellations in single digits; clinic count rising 4 conversions to hygiene; operational improvements; tech enablement Optimize by closing 149 centers; testing hygiene; mobile clinics expansion; Walmart pilot Evolving/Optimizing
Veterinary labor and operations1099 vet pool >3,000; improved staffing/cancellation rates Continued operational efficiency gains in services “Matched contract veterinarian labor with pet demand” in mobile clinics Improving
A&P investments and 2024 positioningReinvesting behind manufactured brands; free cash flow priorities Incremental ~$2M A&P in H2 to build awareness Total ~$4M; Q4 heavy top-of-funnel to drive 2024 conversion Increasing
Retail partnerships (Walmart)——Walmart-branded wellness center pilot; PetIQ operating model Emerging

Management Commentary

  • “We generated growth significantly above our guidance… and record low net leverage. We’ve made important strategic decisions to… focus our spending on the areas… with the most favorable returns.” — Cord Christensen, CEO .
  • “We believe our Services optimization will… result in a significantly stronger, more profitable segment… Our mobile community clinics fueled solid growth… matched contract veterinarian labor with pet demand.” — Cord Christensen .
  • “Record Q3 adjusted EBITDA of $29.3 million… Our higher earnings and improved working capital helped us achieve third quarter record cash from operations… net leverage… 2.8x.” — Zvi Glasman, CFO .
  • “PetIQ manufacturer brands captured 17.7% of the [OTC Flea & Tick] category dollars… up 124bps vs prior year.” — Cord Christensen .

Q&A Highlights

  • Services optimization impact: Management expects ~$10M sales in 2023 and ~$15M in 2024 from closed centers to come out, but those centers were losing ~$6M in EBITDA; optimization cash costs ~$6.3M recouped in ~12 months .
  • A&P reinvestment cadence: Incremental ~$4M in H2; ~$1M in Q3, ~$3M in Q4 focused on awareness ahead of 2024; treat category (Minties) is largest in Q4 seasonality .
  • 2024 outlook tone: Conservatism on weather normalization and base recovery; growth expected but not assuming repeat of exceptional OTC F&T weather tailwind .
  • Walmart pilot: One location, Walmart-branded program; PetIQ as operator providing vet labor and equipment; potential expansion contingent on pilot success .
  • Margin drivers: Efficiency (scale and operations) plus mix; continued SG&A leverage despite increased A&P .

Estimates Context

  • S&P Global consensus estimates for Q3 2023 (EPS, revenue, EBITDA, target price) were unavailable due to a CIQ mapping error for PETQ; therefore, comparisons vs Wall Street consensus cannot be provided. Actuals are benchmarked vs company guidance, which were materially exceeded .

Key Takeaways for Investors

  • Execution and mix drove a quality beat: Net sales and adjusted EBITDA materially exceeded guidance, with gross margin +200bps; share gains in OTC F&T and supplements validate A&P ROI .
  • Services optimization removes loss-making footprint and refocuses capital on mobile clinics and brands; expect ~$6M EBITDA loss avoidance in 2024 and ~$6.3M cash out mostly in Q4, improving run-rate profitability .
  • Strong cash generation de-risked balance sheet: Q3 CFO $50.3M, liquidity $249.6M, net leverage 2.8x; watch for a modest Q4 leverage uptick on working capital timing .
  • Near-term setup: Q4 will be seasonally soft with order pull-forward (~$15M sales) and $3M A&P spend; treat category supports Q4, but investors should model muted sequential growth before 2024 conversion benefits .
  • 2024 narrative: Focus on continuing share gains, hygiene testing, and Walmart pilot; normalized weather and conservative base assumptions temper growth expectations but support continued margin progress .
  • Brand momentum: Rocco & Roxie outperformed (+10.1%), with expansion into premium categories (supplements/treats) offering incremental runway .
  • Monitor category and mix: Favorable OTC F&T compliance and e-commerce penetration are tailwinds; manufacturing efficiencies and SG&A leverage should sustain margin resilience .